Lease Workaround to Qualify for Electric Vehicle Tax Credit

Electric Vehicle Tax Credit Background Information

The Inflation Reduction Act of 2022 (“IRA”) included a full slate of purchase-related tax credits for electric vehicles. However, there are barriers to credit qualification for purchased vehicles. 

Most electric vehicles on sale in the United States today do not qualify for the full $7500 tax credit provided to buyers by the IRA for their purchase of an EV. That is the result of specific criteria laid out for automakers in the law, which include regulations regarding where a vehicle is built. 

To receive the full credit, an electric vehicle (EV) or plug-in hybrid electric vehicle (PHEV) must be built in the United States, or by our partners in Canada or Mexico. A vehicle must also contain an increasing percentage of battery materials sourced from the U.S., or an approved trade partner. The batteries and their components also need to largely be assembled in the United States or North America to qualify for the full credit. There are currently no EVs, or PHEVs produced by a foreign automaker that qualify for the $7500 tax credit after purchase. GM is the only automaker whose entire sub-$80,000 EV lineup meets IRA requirements.

Leased Vehicle Workaround to Qualify for the Electric Vehicle Tax Credit

As a result of lobbying by international automakers, the IRA included a provision that categorizes leased battery-powered models as “commercial vehicles” that qualify for the Electric Vehicle Tax Credit. An automaker, or its in-house finance arm, can tap into the available commercial EV credit by leasing electric cars (that otherwise wouldn't qualify) to customers. This leasing workaround for the credit, which was designed to encourage commercial fleets to go electric, goes to the company that owns the vehicle.

The credit is $7,500 for vehicles that weigh less than 14,000 pounds, and $40,000 for all other commercial EVs. An automaker can opt to keep the credit it earns from owning the EVs that it leases. Or it can pass that along to the customer through the form of a lower monthly lease payment. 

Advantages of Leasing EVs

While the case for leasing vehicles has been growing even without the electric vehicle tax credit workaround, it is expected to increase further because of this provision in the IRA. Leased electric vehicles have rising resale values because of their ability to receive software downloads that can introduce safety technology or enhance the infotainment features in the digital dashboard. Higher resale values lead to lower lease payments because the car is worth more at the end of the lease.

Furthermore, leasing acts like technology insurance for customers who are concerned about replacing the battery on their electric car if it eventually runs dry and can no longer be recharged.

Conclusion

If you have additional questions or concerns regarding the EV tax credit, please reach out to your Herbein team member through the form below.

Article contributed by Vincent E. Sciortino